Despite improvements in the credit markets and industrial production, new data on consumer demand remains disappointing. A sustained recovery is only possible with a turnaround in consumer spending, which would, in turn, encourage corporate investment. This turnaround seems least likely in the United States at present, where household debt remains high, savings are recovering from historically low levels, and job and income prospects remain murky. Consumers in most other parts of the world are in better shape because of their higher savings rates, lower household debt, and smaller investments in equity markets.   
 
Improvements in Production and Credit

• Increases in global production indicators bolstered hopes for a return to worldwide economic growth. The Institute of Supply Management’s Manufacturing Index for July rose 9.2 percent (month-on-month) in the United States. The Purchasing Manager’s Index for the UK rose 7.2 percent (m/m) to 50.8, and for China rose 1.9 percent (m/m) to 53.2. Factory orders in Germany jumped by 4.5 percent (m/m) in June, the most in two years, while U.S factory orders also beat expectations, growing 0.5 percent (m/m).
• Amid signs of easing credit conditions, investors are demanding more risky assets, while decreased demand for sovereign bonds raised yields. Global equity markets rallied with the Dow Jones, Germany’s DAX, and UK’s FTSE 100 gaining between 2.2 percent and 2.7 percent for the week. The yield on ten-year U.S. Treasury bills rose 35 basis points, as demand for the most secure bonds declined.

Economic Policy: Cautious But Supportive
Despite signs of a recovery in production and trade levels, policy makers remained doubtful about consumer demand, which led to policies that cautiously supported economic growth this week.

• Concerns about future inflation in parts of Europe and Asia prompted central banks to make only moderate interest rate adjustments. Russia’s central bank cut its primary rate from 12 percent to 11.75 percent, while the European and Australian central banks left their primary rates unchanged at 1 percent and 3 percent, respectively.
• The Bank of England’s unexpected ₤50 billion extension of its bond purchasing program designed to increase the money supply in an effort to promote lending, was the major exception to the “cautious” policy statements that defined the week. The decision highlights the central bankers’ beliefs that the UK economy remains weak and that deflation, not inflation, presents a much more immediate threat to its economic recovery.
• Chinese officials may consider “fine-tuning” interest rates and slightly tightening monetary policy in response to concerns that easy credit has led to reckless bank lending, creating stock and property value bubbles. The signs of imminent recovery are clearest in Asia, with China and Australia among the first countries to signal that interest rates may rise in the coming months as stimulative policy stances are moderated.

Uncertainty Over Consumer Spending
Consumer spending data was mixed at best. Personal income, employment, consumer confidence, and retail sales numbers suggest consumer recovery is a ways off.

Slumping consumption from retail sales is a global problem.

• In the United States, where consumer spending accounts for 70 percent of the economy, June same-store sales fell 4.9 percent. Same-store sales at BJs, Costco, and Target declined 7 percent, 6.5 percent, and 9 percent, respectively, from July 2008.
• European retail sales fell 0.2 percent (m/m) and 2.4 percent (y/y) in June. Germany’s retail sales in June were down 1.8 percent (m/m) from May, 1.6 percent from a year ago, and 2.1 percent from January through June of the same period last year.
• Spurred largely by “cash for clunkers” programs, auto sales increased globally in July – led by a 16 percent (m/m) increase in the United States, and by a 29.5 percent increase in Germany.
• Retail sales in Japan fell 0.3 percent (m/m) in June, and were down 3 percent compared to a year ago. Similarly, three-months average retail sales in Japan and China were down 1 percent and 0.3 percent in June, compared to three months ago.
• National income accounts showed that consumer spending fell at annualized rates of 6.8 percent in Japan and 1.2 percent in the United States in the second quarter, and by 5.3 percent in the UK in the first quarter.

Personal incomes are also weak.

• U.S. wages and salaries fell 4.7 percent in the twelve months through June, the biggest drop since records began in 1960. Personal income in June alone fell 1.3 percent as stimulus checks, which pushed personal income up by 1.3 percent in May, expired. Spending rose 0.4 percent, but fell 0.1 percent after adjustment for inflation. Household indebtedness, however, fell from 132 percent of disposable income at the end of 2007 to a still-high 124 percent at end of March, reflecting higher savings rates among consumers.
• Monthly wages in Japan slid 7.1 percent from a year earlier in June, the sharpest drop since 1990.

Though home prices and sales improved, activity remains depressed.

• According to Deutsche Bank AG, almost half of U.S. homeowners with a mortgage are likely to owe more than their properties are worth before the housing recession ends.
• Despite the recent rise in mortgage rates, U.S. pending home sales and new home sales rose 3.6 percent and 11 percent in June, while new home construction expanded and house prices moderated.
• Home sale levels recorded a roughly 20 percent drop in June compared to the same period last year, indicating that the housing market has yet to fully rebound.

The pace of job losses appears to be moderating, though unemployment remains at historically high levels.

• Declines in the U.S. unemployment rate were partly the result of a large number of workers withdrawing from the labor force. The rate, which had trended up since April of 2008, fell slightly to 9.4 percent from 9.5 percent. The 247,000 jobs shed from U.S. payrolls in July were significantly less than the 443,000 lost in June. Initial jobless claims also fell by 38,000 to 550,000 last week.
• The unemployment rate in Japan is approaching 5.5 percent.
• Unemployment in the Euro area continued to increase in June, where it reached 9.4 percent (almost 15 million people).

Consumers remained constrained by stagnant incomes and gripped by unemployment fears.

• In the United States consumers are more pessimistic after a sustained upswing in confidence since February. The Conference Board’s Consumer Confidence Index dropped 10 percent (m/m) in June and 5.5 percent (m/m) in July.
• China’s consumer confidence appears to be fragile, despite the initial success of the government stimulus package. Consumer confidence fell by 0.2 percent (m/m) in June, and confidence in the period from April to June was down more than 8 percent compared to the same period a year ago.

Looking Ahead
To see how consumer spending is evolving, look for the release of U.S. July retail sales and the University of Michigan Consumer Sentiment Index, both of which will be released on Thursday, August 13. European, German and French GDP data is also due out on Thursday.

This analysis was produced by the editorial staff of the International Economic Bulletin, including Shimelse Ali, Bennett Stancil, Mihir Narain, and Uri Dadush.